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Analyzing the Business Correspondent Model (Part I) - Why BCs?

Today,
we begin a series on the Business Correspondent (BC) model based on findings
from CMFs on-going studies and external research on the sector. For starters,
what are the particular advantages of using information and communications
technology (ICT) based correspondents for banks in order to achieve the
Financial Inclusion goals of the Reserve bank of India (RBI)?

In
rural areas, major inconveniences for the poor in accessing banking services
include the cost of traveling long distances and waiting in long queues. These
costs are significant when we account for the opportunity cost to daily wage
earners. On top of this, they face problems filling bank forms coupled with the
unwillingness of the bank staff to cooperate and provide the required level of
assistance. All these factors serve as major deterrents to using formal banking
services. Instead, they’re forced to use high risk informal savings mechanisms
such as saving at home, with their friends/relatives, land lord, employer or
with local moneylenders.

So
how could we solve these accessibility issues and provide a safe, convenient
platform for accessing formal banking services in remote rural areas?

Let’s
brainstorm. India has a population of 1.25 billion and almost a billion mobile
phones with high signal penetration in remote rural areas. So why not use
mobile banking? Maybe we could even establish credit scores for these people by
collecting transparent transaction data from telecom companies and slowly
graduate them to bigger loans! (Are we getting a little carried away here?)

Would
people in rural areas who mostly use their mobile phones to receive calls and
have low literacy levels be able to efficiently use m-banking facilities on
their cellphones? Here, we see a market for agents coordinating the banking
activities of a number of people in their vicinity and charging a small fee for
their services. What else would we need?

If
41% of India’s adult population is unbanked and lacks the ability (and motivation)
to fulfil KYC requirements, how will they be able to use these banking services
in the first place? Here, we can see the need for banks to relax Know Your
Customer (KYC) requirements and provide specialized bank accounts focused on
small balances with a preference for users who deposit and withdraw small
amounts. So how did the RBI go about setting up this system?

In
2005, RBI called for Indian banks to design a no precondition, zero minimum balance
saving account with relaxed KYC requirements. This led to the evolution of
No-Frills saving accounts established by multiple banks which simply require a
voters ID for registration or a recommendation from someone who has fulfilled
KYC requirements. Secondly, in 2006, the RBI permitted banks to use the
services of NGOs/MFIs registered under the Societies/Trusts Acts, Societies
registered under the mutually aided cooperative societies or the cooperatives
society’s acts of states, Section 25 companies and registered NBFCs (not
accepting public deposits) and post offices as ‘business correspondents’ (BCs).
These BCs can act as agents of the bank and open No-Frills accounts for their
clients along with conducting a host of other banking activities.

A BC agent conducting a transaction (Source: The Economic Times)

The
advantages of this model are significant. With their quick transaction
facility, BCs provide their customers the ability to transact small amounts
without the accessibility issues of travelling to distant bank branches or the
opportunity costs of losing a day’s wage. They can also induce savings
behaviour among their clients, giving them the option to save when they desire
in the amounts of their choice. The clients can trust them as the BC agent is
usually a part of the community and the agent is more helpful and patient with
his clients as well. The elimination of the need to travel solves the risk
associated with carrying cash and being included in the formal banking system
also solves flight risks associated with using informal saving mechanisms. On
top of this, BCs provide 3.5% annual interest and can provide support to the
lending process between a client and the bank. This system solves the majority
of problems associated with access to formal banking in financially excluded
areas.

And
yet, the model’s performance has been disappointing since its inception in
2006. An upcoming CMF study shows that urban CSPs (Customer service providers)
are operating profitably while rural CSPs are not. Reports also suggest that only
about 20% of the 100 million No-Frills accounts opened so far are actually
active. Given the significant advantages of the model over existing informal saving
options, why would it fail? We’ll discuss the reasons for low take up of the BC
model and high levels of dormancy in No-Frills accounts in the next two posts of this four-part series.

Comments

Thank you for writing this post in a clear manner that is easy for the layman to grasp, while still exploring the intricacies and concepts. A carefully wrought balance of ideas and praxis, executed without losing sight of the daily-life-reverberations of the issue. Looking forward to the next part.

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